Sage's Smith: Cool It, Bonds Will Be Fine

July 27, 2017

Sage is the world’s leading fixed-income ETF strategist. Based in Austin, Texas, it’s made a name for itself by offering institutional-grade insights and portfolios that consistently stay one step ahead of where fixed income is going.

That’s one of the reasons Bob Smith, co-founder of Sage, is speaking at Inside Fixed Income, the world’s leading bond ETF conference, taking place Nov. 2-3 in Newport Beach, California. He sat down recently with Inside ETFs to discuss what he plans to talk about at the conference, and where he sees risks and opportunities in the ETF market.

Inside ETFs: With the 35-year decline in interest rates seemingly over, should investors even own bonds in today's market?

Bob Smith: The answer is yes. The question is, for what purpose? I think in every investment, one has to see the utility that an investor needs for their life style.

Clearly, for anybody who has a cash flow sensitivity, or the need for principal at a particular date in terms of fulfilling a certain funding or a certain drawdown, fixed income is a far more predictable and less volatile asset class compared to anything in the equity spectrum or any of the alternatives. It offers peace of mind for those who really want some predictability in terms of outcomes and reaching their goals.

Inside ETFs: But should investors hold fewer bonds in their portfolios than they did in the era of falling rates?

Smith: If you look at it purely from a total return perspective, one would argue that we probably are in a basing or bottoming of this particular cycle … although I think the jury is still out.

If you look at 10-year Treasurys, there are those who would forecast rates going somewhere to about 2.75-3% or beyond. And then there are those that feel the economy has had virtually no growth.

You look at the money supply and you look at the still-declining velocity or turnover of that money supply—it's highly suggestive of an economy that's not really growing much beyond the 2%-plus trajectory we've been stuck in for many years.

We're still in a trading range. And in this environment, I think it's probably worthwhile to hold a good position in high-quality investment-grade securities. Bonds are not as attractive as when they were at 5% and 4% coupons, but in today's world, we're not going all the way back to 4% or 5% quickly. Therefore, it's more of a hold than it would be a buy at this point.


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